What Credit Score do You Need to Buy a Home?
When it comes to mortgages and credit scores, there are two really important questions to ask:
–What credit score do I need to qualify for a mortgage?
–What credit score do I need to get the lowest interest rate on a mortgage?
These different but related questions are important if you are looking to buy a home. And the second question is particularly important. With a high FICO score, you can literally save tens of thousands of dollars in interest over the life of a home loan. So let’s take a look at both questions. And if you don’t know you score, be sure to get you free credit score.
What credit score do you need to qualify for a mortgage?
The first thing to keep in mind is that qualifying for a mortgage involves a lot more than just a credit score. While your FICO score is a very important ingredient, it is just one factor. Lenders also look at your income and level of debt, among other things.
As a rule of thumb, however, a credit score below 620 will make buying a home very difficult. A FICO score below 620 is considered sub-prime. In the past there were mortgage companies that specialized in sub-prime mortgages. Because of the challenges in the credit market over the last year or so, however, sub-prime loans have become difficult if not impossible to obtain.
A FICO score between 620 and 650 is considered fair to good credit. But keep in mind, this range of credit scores does not guarantee you will qualify for a mortgage, and if you do qualify, it won’t get you the lowest interest rate possible. Still, to buy a home aim for a score of at least 620, recognizing that other factors weigh in the decision and that some banks may require a higher score.
What credit score do you need to get a low rate mortgage?
It use to be that a score of about 720 would yield the lowest mortgage rates available. Today, the best rates kick in with a FICO score of 760. And interest rates go up significantly as your credit score drops. To give you an idea, the following table shows current rates by credit score and calculates a monthly principal and interest payment based on a $300,000 loan:
- Credit score 620 and above with the mortgage investors we work with, even though FHA will insured lower credit scores, most mortgage lenders will create overlays
- No bankruptcies (Chapter 7) in last 2 years with clean credit afterwards and 3 years after a foreclosure or short sale
- 3.5% Down payment. Can be gifted or money saved-up or money taken out of 401k or retirement account. No cash gifts or unsourced deposits are allowed for down payment on a FHA loan.
- Debt to income ratios can be up to 55% on an Approved Eligible Files but restricted on manual underwrites to 31% and 43% respectively.
- Overtime or bonus income needs to show a 2 year history for it be eligible for income qualifying on a FHA loan. FHA underwriters typically will take a 2 year average.
- FHA appraisals with the new changes now call for the FHA appraiser to check and review the home more thoroughly, hence the typical costs of a FHA appraisal has gone from $325 to $425 due to more legwork involved on a FHA appraisal.
- Any disputes on credit bureau will need to be taken out of dispute status typically for your credit scores to be validated, so please be aware of this.
- Rent references are usually not called for unless your file get downgraded to a manual
- FHA mortgage insurance the upfront and annual mi monthly fee is for life of loan.
- A lender may approve a borrower if: acceptable payment history and no major derogatory credit on revolving accounts in the last 12 months. “Acceptable payment history” means: the borrower made all housing and installment debt payments on time for the previous 12 months, and there are no more than two 30‐day late mortgage or installment payments in the last 24 months. “Major derogatory credit” means: payments made more than 90 days after the due date, or 3 or more payments made more than 60 days after the due date.
- Child support income is Allowed If using a voluntary payment agreement, the lender: obtains 12 months canceled checks, deposit slips, or tax returns. For divorce decree, legal separation agreement, or court order if there is evidence of receipt for the most recent 6 months, may use the current payment to calculate income, & if there are not 6 months of consistent payments, may average the income received over the prior 2 years, or less if the income has not been received that long 4000.1 II.A
Senior Loan Officer